I recently read The Millionaire Next Door by Thomas J. Stanley and William D. Danko. I wish someone had told me about this book years ago! It was published in 1998 but I only heard about it earlier this year.
The book tells us about two types of people:
- Under Accumulators of Wealth (UAW) are individuals who have low net worth with respect to their income.
- Prodigious Accumulators of Wealth (PAW) are individuals who have high net worth with respect to their income.
For a long time, I was a UAW. Before I entered the financial sector, I didn’t earn that much and most of my money went into paying off debt and medical expenses for a sick parent, so there was really not much to go around. A few years ago, I got a lucky break and landed a job that paid a much better salary. However, the higher income didn’t immediately translate to higher net worth – my husband and I were continually spending most of our paychecks. We are based in Tokyo, Japan, where the cost of living is quite high. We were saving less than 10% of our annual income.
Finally, in 2011, we had a wake-up call when the earthquake struck Tohoku. We realized then how small our nest egg was, particularly if we had to leave Japan and start over in a different country. We began seriously putting aside money in late 2011. During a 1.5-year period, we accumulated around 100,000 USD. The book provides a formula for calculating how much our net worth should be at our age – we should have at least 600,000 USD at our present age. This is the reason I have set an 800,000 USD target for us to reach within the next ten years.
So how can my husband and I go from being under accumulators to prodigious accumulators of wealth? The book has some good lessons based on the lives of first-generation millionaires:
- Live below your means. This is always the first rule in wealth building, so it didn’t come as a surprise. However, the various examples the authors mentioned in the book did help drive home the point. We were indeed spending less than what we were earning, but not by much. One important point made by the book was that PAW households always had a budget; my own household never had one!
- Forego the extravagant lifestyle. This is a corollary to the first point. The authors pointed out that UAW households are normally enmeshed in perpetually keeping up with the Joneses. High-income professions have the added pressure of maintaining status symbols to impress clients – expensive suits, shoes, watches, cars, etc. Houses in the higher class neighborhoods cost more to buy, decorate, and maintain. The main point was that many UAW households aspire for the lifestyle of the wealthy, even though they are not yet particularly wealthy themselves. The millionaires surveyed in the book lived in modest homes, often within neighborhoods that had lower average incomes. For a time, my husband and I were also caught up in the thrill of the luxurious life but we too have found the exorbitant costs of status items to be impractical in the long run.
- PAW are savvy investors. Many of the millionaires in the book achieved high net worth because they invested their income. They took the time to learn about their finances, sought the best individuals for financial advice, and took risks, particularly in the areas they were knowledgeable. This was in contrast to the UAW, who viewed the stock market with suspicion and would go for the cheap alternative when it came to their financial advisor. My husband and I only started investing in 2011 and we still have a lot to learn, but we are already getting decent gains.
If you haven’t already, I suggest you go pick up a copy of the book and read for yourself! Here is a link to the Amazon page.